The Fed Blog

Tuesday, November 29, 2016

We Are All Populists Now

The February 6, 2009 cover story of Newsweek was titled “We Are All Socialists Now.” I reread it over the weekend, and was floored by the first paragraph:

On the Fox News Channel last Wednesday evening, Sean Hannity was coming to the end of a segment with Indiana Congressman Mike Pence, the chair of the House Republican Conference and a vociferous foe of President Obama’s nearly $1 trillion stimulus bill. How, Pence had asked rhetorically, was $50 million for the National Endowment for the Arts going to put people back to work in Indiana? How would $20 million for "fish passage barriers" (a provision to pay for the removal of barriers in rivers and streams so that fish could migrate freely) help create jobs? Hannity could not have agreed more. "It is … the European Socialist Act of 2009," the host said, signing off. "We’re counting on you to stop it. Thank you, congressman.”

Jon Meacham, the author of the piece, concluded, “Whether we want to admit it or not--and many, especially Congressman Pence and Hannity, do not--the America of 2009 is moving toward a modern European state.”

Now Pence is the VEEP-elect and Hannity is one of the favorite journalists of POTUS-elect Donald Trump. None of them are socialists. However, they are all now self-proclaimed populists. I’m not sure what the difference is, since both socialists and populists tend to advocate strong government intervention to help the common man, the little guy, and the forgotten man.

In his speech after Tuesday’s election, Donald Trump referred to America’s “forgotten men and women” who propelled him to victory. They are the blue-collar workers in the manufacturing towns of the Rust Belt and the hollowing coalfields of Appalachia. These people feel left behind by progress, laughed at by the elite, so they put their faith in the billionaire businessman who promised to Make America Great Again.

In a fireside chat over the radio on April 7, 1932, Franklin Delano Roosevelt used the phrase “forgotten man” to promote his New Deal: “These unhappy times call for the building of plans that rest upon the forgotten, the unorganized but the indispensable units of economic power, for plans like those of 1917 that build from the bottom up and not from the top down, that put their faith once more in the forgotten man at the bottom of the economic pyramid.”

Given that both Trump and Hillary Clinton promised to spend lots of money on infrastructure to create good-paying jobs, maybe we are all Keynesians now too. By the way, Nixon never said, “We are all Keynesians now.” What he did say was, “I am now a Keynesian in economics.” Milton Friedman was also misquoted on this subject. What he actually said was: “In one sense, we are all Keynesians now; in another, nobody is any longer a Keynesian.”

In any event, VEEP-elect Mike Pence is a Keynesian now who supports Trump’s $1 trillion of spending on infrastructure. So is Steve Moore, one of the founders of supply-side economics. He recently declared himself to be a populist now.

Before turning to the future, let’s stay in the past and try to see what Trump saw when he ran into all those forgotten people he met on the campaign trail. Here are some relevant observations:

(1) Exhibit A against China. In researching the causes of the productivity slowdown during the current economic expansion, I ran a chart of the Fed’s indexes for manufacturing industrial production and capacity. They both are available monthly since the late 1940s. Both have been on uptrends since the start of the data until about 2001, when both started moving sideways. China entered the World Trade Organization (WTO) on December 11, 2001.

While manufacturing production reflects the ups and downs of the business cycle, manufacturing capacity has a long history of relatively stable growth. In fact, on a year-over-year basis, the former tends to turn negative, while the latter had remained positive until it turned slightly negative for the first time from September 2003 to October 2004, and again from August 2008 to November 2011. Capacity growth averaged 3.9% from 1949 through 2001. From 2002 through 2015, it averaged just 0.4%.

If we were all populists now, I would argue that this is Exhibit A confirming that US companies stopped expanding their capacity in America ever since China entered the WTO. Instead, they invested in factories in China or outsourced to Chinese factories to produce goods that now are imported into the US rather than made here by American workers.

(2) Smacking productivity. If we were all populists now, I would challenge the argument made by Globalists that Americans have lost jobs as a result of labor-saving technological innovations, rather than the migration of jobs to Chinese workers. I would counter that this notion isn’t supported by the flat trends in manufacturing production and capacity since 2001. Technological innovation should expand manufacturing capacity and boost labor productivity. Yet nonfarm business productivity growth has been extremely weak during the current economic expansion. Over the past 20 quarters (five years), it is up only 0.7% per year on average. It has never been this weak during an economic expansion!

Not surprisingly, there does seem to be a good correlation between the growth in manufacturing capacity on a y/y basis and the five-year growth trend in productivity. The latter tends to grow fastest during or soon after a period of fast growth in capacity. This makes sense to us. If companies aren’t expanding capacity at home, then domestic productivity is likely to suffer.

(3) Whacking real incomes. If we were all populists now, I would also note that productivity drives the standard of living, which by some measures seems to have stagnated for years. That jibes with the high correlation between the 20-quarter growth rates in productivity and real hourly compensation in the nonfarm business sector. The latter is up just 1.0% per year on average, among the slowest five-year growth rates since the start of the data in the early 1950s.

(4) Blaming foreigners. If we were all populists now, I would support the view that free trade hasn’t been fair trade by observing that our merchandise trade deficit was $724 billion over the past 12 months through September. That is below its record high of $851 billion during October 2008. However, excluding the petroleum trade deficit, which has narrowed dramatically in recent years, the merchandise deficit, at $670 billion over the past 12 months through September, remains near recent record highs.

Now let’s round up the usual suspects. Over the past 12 months through September, our trade deficit has been as follows among our major trading partners: China ($350 billion), Eurozone ($128 billion), Japan ($69 billion), and Mexico ($63 billion). In terms of product categories, the US is running merchandise trade deficits over the same period in autos ($199 billion), non-auto capital goods ($69 billion), and non-auto consumer goods ($389 billion). China currently accounts for 48% of the US trade deficit. Mexico accounts for just 9% of it.

(5) The case for Globalization. At the risk of getting tar and feathered by the populists, allow me to make the case for Globalization. (These are my own views, so my associates at YRI should be held harmless.) For starters, the US quarterly balance-of-payments accounts show that the US trade deficit in goods, which was $751 billion over the four quarters through Q2-2016, was partially offset by a sizable trade surplus in services of $251 billion.

In any event, the horses may already be out of the barn. Only 8.5% of payroll employment is now attributable to manufacturing, down from 10.3% 10 years ago, 14.3% 20 years ago, and 17.5% 30 years ago. Bringing factory jobs back to the US may bring them back to automated factories loaded with robots. Even Chinese factories are using more robots.

The standard of living hasn’t stagnated in the US. That notion has been promoted by the President-elect, and other populists, who have observed that real median household income has been virtually flat since 1999, though it did jump 5.2% during 2015. Previously on several occasions, I questioned the accuracy of this data series, which is based on survey (micro) data, is limited to money income, is pre-tax, and is pre-noncash entitlements. Macro data based on tax returns and other fact-based sources, on real personal income, disposable personal income, and consumption per household all remain on rising trends and are at record highs. While my data are averages (means) rather than medians, I doubt that there are enough rich people to seriously distort my numbers, especially for real mean consumer spending per household.

The main argument for free trade is that it lowers prices for consumers since imported products must be cheaper to make overseas than at home. Everyone is a consumer, so everyone benefits from lower prices. Studies have shown that it would be much cheaper to provide income support and retrain workers who have been harmed by Globalization than to impose prohibitive tariffs to force production to come home, thus reducing the standard of living of all consumers, who must pay higher prices for domestically produced goods.

Business Insider published an article on 11/27 that was titled “Here’s what 5 of your favorite products would cost if they were made in the US.” The price of iPhones could more than double. Jeans would cost more than $200. The price of sneakers might also double. TV prices might not go up much since transportation costs would be lower for domestically produced units, but solar panel prices would be much higher.

The election results clearly show that there are many people who feel that they have been harmed by Globalization. They may not realize that they have also benefitted from it through lower prices on the goods they purchase. It is unlikely that prohibitive tariffs will bring back manufacturing jobs paying much higher wages. Those days are probably gone. The best hope is that Globalization increases incomes, consumption, and standards of living around the world, thus leveling trade imbalances.

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ABOUT: Dr. Ed Yardeni is the President and Chief Investment Strategist of Yardeni Research, Inc., a provider of independent investment strategy and economics research. This blog highlights excerpts from our research service, which is designed for investment and business professionals.

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